Suppose an industry emits a negative externality such a pollution and the possible methods to internalize the externality are command-and-control policies, pigovian taxes, and tradable pollution permits. If economists were to rank these methods for internalizing a negative externality based on efficiency ease of implementation and the incentive for the industry to further reduce pollution in the future, they would probably rank them in the following order (from most favored to least favored) ?
Correct answer: B. tradable pollution permits, Pigouvian taxes, command-and-control policies
- A. Pigouvian taxes, command-and-control policies, tradable pollution permits.
- B. tradable pollution permits, Pigouvian taxes, command-and-control policies
- C. tradable pollution permits command-and-control policies, Pigovian taxes.
- D. command-and-control policies, tradable pollution permits, Pigovian taxes.
- E. They would all rank equally high because the same result can be obtained from any one of the policies
Explanation
Tradable permits combine an emissions limit with flexibility, allowing the lowest-cost firms to reduce pollution and preserving incentives for further reductions. Pigouvian taxes are generally next, while command-and-control rules are less flexible and provide weaker continuing incentives.
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